James Hardie Industries plc (JHX) Earnings Call Transcript

Welcome to the James Hardie Second Quarter Fiscal Year 2027 Earnings Call. I would now like to hand the call over to Bill Seymour, VP of Investor Relations. Please go ahead.

Thank you, operator, and thank you to everyone for joining today's call. I am joined today by Aaron Erter, CEO of James Hardie; Ryan Lotta, CFO; and John Skeelly, President and General Manager, North America Building Products. Before we begin the call, please note that during prepared remarks and Q&A, we may refer to non-GAAP financial measures and make forward-looking statements. You can refer to several related cautionary and other notes on Slide 2 of our earnings presentation for more information. Forward-looking statements made during today's conference call and in the earnings materials speak only as of the date of this call. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Accordingly, investors are cautioned not to place undue reliance on forward-looking statements. In addition, non-GAAP measures should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. Reconciliations of non-GAAP measures discussed today can be found in our earnings presentation, which is posted on our website. Also, unless otherwise indicated, our materials and comments refer to our continuing operations, excluding Europe, following the announcement of our planned divestiture of our European segment and its corresponding reclassification into discontinued operations. Further, unless otherwise noted, figures are in U.S. dollar and any comparisons made are to the corresponding period in the prior fiscal year. With that, I'll hand the call to Aaron.

Thanks, Bill. In my remarks, I'll cover what drove our second quarter performance and the progress we are making against the commitments we laid out for fiscal 2027 and reinforced at Investor Day. Then I'll hand it to Ryan to walk through the financials and guidance in more detail. Q2 was a strong quarter against a challenging housing market backdrop. Net sales from continuing operations grew 24%, driven by strong sales performance across each of our segments. Reported growth included some expected timing benefits, which we will separate out today, and you'll see that our underlying performance remains well ahead of the market. We delivered this by staying focused on what we can control, material conversion, commercial execution, cost discipline and continuous improvement through our Hardie operating system. Let me get into the quarter. The housing and macro backdrop remains uncertain and has weakened versus our May assumptions. Multiple indicators are pointing to softer conditions, especially in new construction and to a lesser extent, repair and remodel. Based on external estimates and our own market intelligence, we now expect the market using our blend of 60% repair and remodel and 40% new construction to decline by a mid-single-digit percentage in total this year compared to our May estimate of a low single-digit blended decline. Within that, we expect repair and remodel to be down low single digits and new construction down high single digits, which means we expect the market to decline more in the second half than it did in the first half. Despite that, we continue to expect to outperform the market in both the second half and for the full year. Looking at the second quarter, even excluding channel normalization and the net impact of the distribution changes, our sales growth and sell-through were well above the market and in excess of the 4 to 7 points of annual above-market growth we targeted at Investor Day. Siding and trim net sales were up 15% and above the high end of our guidance range. This performance and growth above market primarily reflected continued traction from our sales initiatives. Multifamily growth was also strong, reflecting our share gains in this category and its relative affordability in this environment. In Deck, Rail & Accessories, sales were up 51%, in line with our expectations, driven by share gains, execution against material conversion opportunities and the positive impact of distribution changes. The decking market continues to outperform the broader market and demand remains resilient in the premium end of repair and remodel, where we are very well positioned. Australia and New Zealand delivered another strong quarter with sales up 21%, driven by continued share gains. Product innovation remains a highlight. Our new Hardie Gravis AAC panel launched in June extends our reach into mixed material facades and TimberTech by James Hardie Decking is bringing these products to the region as we expand into outdoor living. Earlier this year, we laid out 5 clear fiscal 2027 commitments: return fiber cement to growth, outperform the market across our portfolio, expand adjusted EBITDA, deliver cost and revenue synergies and drive a step-up in free cash flow to support deleveraging. Halfway through the year, we're pleased with our progress against each of these. First, returning fiber cement to growth. North American fiber cement revenue grew 15% in the quarter. Our fiber cement growth plan is focused on 3 conversion priorities: converting vinyl siding, winning against wood and expanding our premium products. On vinyl, our trim over method is moving the needle, opening up lower-priced homes that have historically been harder for fiber cement to reach, particularly in the Northeast and Midwest, where repair and remodel wood and wood look siding alone represent an approximately $1 billion conversion opportunity. Trim over, which surpassed 16 million installed square feet in the quarter, significantly lowers on-the-wall costs and improves contractor economics. And the rollout of Hardie Pro Lab is turning that value proposition into strong momentum. On wood conversion, as we outlined at Investor Day, we continue to focus on the $1.3 billion fire code opportunity in the West. In premium products, sales of our higher-priced, higher-margin ColorPlus fiber cement siding products grew 22% in the quarter, helped in part by our program to improve product availability for contractors at the job site. This contributed to strong positive mix in the quarter. Second, market outperformance. Our model is working. We're not waiting for the market to get better. We're using our own levers, a $23 billion material conversion opportunity, growth initiatives and commercial synergies to drive growth above the market. Third, adjusted EBITDA expansion. Adjusted EBITDA margin was nearly 32% in the quarter, up 450 basis points, showing the earnings power of our model. Fourth, revenue and cost synergies. On commercial synergies, momentum continues to build. We are on track to reach both our fiscal 2027 target of $125 million in run rate commercial revenue synergies and our total $500 million target. Our expanded distribution partnerships with Boise and our regional distributors are a foundational driver. The bigger opportunity is what is happening now, cross-selling to builders, dealers and contractors across the combined portfolio. On cost synergies, we remain ahead of schedule, having realized $90 million cumulatively since deal closing. As we reiterated at our Investor Day, we expect to achieve our 3-year target early, exiting fiscal 2027 at $125 million cost synergy run rate. And we don't intend to stop at $125 million. We see additional opportunities from extending the Hardy operating system into our Deck, Rail & Accessory plants, procurement scale, formulation work and systems consolidation. Finally, free cash flow and deleveraging. Based on strong first half performance, we are raising our full year free cash flow target. That cash generation, together with $600 million of Europe sale proceeds earmarked for debt repayment, keeps us well on track to reach our leverage targets. With that, I'll turn it over to Ryan, who will walk you through our financial results and outlook.

Thanks, Aaron. Before I get into the results, let me cover a few technical items. Beginning in the second quarter, the Europe segment is classified as held for sale and presented as discontinued operations. Europe's results are now excluded from our net sales and adjusted EBITDA from continuing operations. Instead, they appear as a single line on our income statement. Prior periods have been recast on the same basis. This affects consolidated results only, not segment results. Both our prior guidance and today's guidance are on a continuing operations basis, excluding Europe. As a reminder, beginning last quarter, adjusted EBITDA and our other non-GAAP measures exclude share-based compensation expense. Finally, with the ASAC acquisition now fully lapped, we will no longer reference pro forma or organic growth metrics for quarterly comparisons. Now to the results. Net sales from continuing operations for the second quarter were $1.43 billion, up 24% at the high end of our guidance range. Adjusted EBITDA was $455 million, up 44% above our guidance range. Adjusted EBITDA margin was 31.8%, up 450 basis points. The strong margins were driven by volume, price and mix and cost savings, offset by general inflation and higher freight costs. Incremental flow-through was approximately 45% in the first half, above our 35% plus Investor Day framework. Adjusted diluted EPS from continuing operations was $0.42, up 68%, driven by the increase in operating income and lower interest expense on debt. We expect incremental cost pressure in fiscal 2027 to be at the high end of our prior $80 million to $100 million range, primarily from freight, raw materials and energy. Roughly 2/3 of that impact is in North America. Freight remains the largest source of pressure, compounded by higher diesel prices and North America Fiber Cement is the most affected. Raw material costs are still a factor, but they have moderated as expected. These pressures are reflected in our guidance. On freight, as we previously discussed, approximately 90% of our lanes are contracted with the remainder priced at spot where we have seen considerable pressure. We are contracting additional lanes now, targeting increased contracted coverage by the start of fiscal 2028 to materially reduce our spot exposure. On the other side of the ledger, cost synergies and footprint optimization are delivering benefits on our quarterly results, helping offset inflation alongside pricing realized this year. The Hardie operating system now introduced across the legacy ASAC footprint supports disciplined cost management as volumes change. We will continue to align our cost base with market conditions. In Siding & Trim, net sales were $880 million, up 15% and above our guidance range. Fiber Cement growth was approximately half volume with the remainder driven by price and mix. Sell-through was up low double digits, well ahead of declining end markets. Siding & Trim adjusted margin was 34.6%, up 540 basis points, reflecting volume leverage, price and mix, continued plant and cost savings and the manufacturing footprint optimization work. In Deck, Rail & Accessories, net sales were $387 million, up 51%. Of that growth, approximately 21 percentage points came from the distribution changes at Boise and other distributors and 16 points from channel inventory normalization after Q1. That leaves you with approximately 14 points from underlying growth. Sell-through was up low double digits, well ahead of the overall market decline. Sell-through was strong across both Pro and retail channels. Adjusted EBITDA margin was 33.3%, up 260 basis points, driven by higher volume and pricing and production returning to normal levels after the first quarter. Despite all the changes with our distribution partnerships, channel inventories ended the quarter at healthy levels, aligned with demand for both Siding & Trim and DR&A. In Australia and New Zealand, U.S. dollar net sales were $161 million, up 21% and up 12% in local currency. EBITDA margin was 35.3%, reflecting strong flow-through on higher volumes, manufacturing efficiencies and lower input costs. Free cash flow was $535 million in the first half, driven by higher earnings, lower CapEx, lower integration expense and improved working capital management. Free cash flow conversion of adjusted EBITDA is expected to be over 40% this year, modestly ahead of our 38% target we set for fiscal 2027. We repaid $111 million of term loan debt in the quarter, bringing total debt repaid since closing the AZEK acquisition to just over $1 billion. Net leverage ended the quarter at 2.3x, already ahead of our 2.4x fiscal year-end target. We will continue to focus on debt paydown and fully expect to achieve our leverage target of below 2x by fiscal Q2 2028. Turning to our outlook for the third quarter and fiscal 2027, both excluding Europe. In Q3, we expect net sales from continuing operations of $1.058 billion to $1.14 billion. We expect adjusted EBITDA of $298 million to $320 million. For the full year of fiscal 2027, we are reaffirming our outlook. On a continuing operations basis, we expect full year '27 net sales of $4.99 billion to $5.13 billion or growth of 6% to 9% and adjusted EBITDA of $1.45 billion to $1.534 billion. Our guidance at the midpoint implies consolidated net sales in the second half of fiscal 2027, will be down slightly year-over-year, still outpacing the market. In Siding & Trim, 2 factors drive the decline from the first half. First, we now assume the new construction market weakens further in the second half and will be down high single digits for the year. Second, first half Fiber Cement results benefited from the comparison against last year's detox. In DR&A, there are 3 drivers. First, we expect the R&R market will be modestly weaker in the second half than in the first and down low single digits for the year. Second, the third quarter is seasonally the lowest quarter for DR&A as customers traditionally reduce inventory heading into calendar year-end. Third, the first half included onetime benefits, most significantly, the load-ins at Boise and other distributors associated with the distribution changes. Across both segments, given the uncertain macro environment, we are being deliberate about keeping channel inventories healthy. We continue to expect both Siding & Trim and DR&A to outperform the market in the second half, consistent with the framework we outlined at Investor Day. Second half EBITDA for both segments is expected to be lower, reflecting reduced volumes the incremental freight costs discussed earlier and planned costs associated with distribution changes. We are raising our full year free cash flow target to more than $650 million, up from $600 million or more. Two things are driving that increase. First, our financial outperformance in the first half; and second, favorable working capital, mainly from inventory reduction. A few other modeling notes. Our adjusted effective tax rate was 21.8% in Q2, and we expect about 22% going forward. Weighted average diluted shares were $586 million and should remain broadly consistent throughout the year. Adjusted net interest was $58 million in Q2, and we expect about $55 million per quarter for the rest of the year. A quick update on the Europe divestiture. The sale process is on track and we continue to expect to close the transaction in the first half of calendar year 2027. The wind down of our European Fiber Cement business is also on track, and we expect to complete it prior to close. With that, I'll turn the call back to Aaron.

Thanks, Ryan. Before we open it up to questions, let me leave you with a few thoughts. At the halfway mark, we're delivering against the commitments we made for fiscal 2027. Fiber cement is back to growth. We're outperforming the market. We're expanding adjusted EBITDA. Revenue synergies are building momentum and cost synergies are ahead of schedule. Free cash flow is driving deleveraging, giving us more future optionality in how we allocate capital. We're focused on what we can control. We have a clear strategy, a broad set of self-help growth levers and a team that is executing. Looking ahead to the rest of this year, we believe our outlook is prudent in light of the current market environment. We're not assuming a near-term housing recovery, and we don't need one to execute our plan. And when the market does turn, we're well positioned to capitalize. Finally, I want to thank our teams across James Hardie for their hard work, focus and commitment to our customers every day. We're proud to have been recognized by Forbes as one of the world's best employers in 2026. And that recognition belongs to our people. None of this happens without them. With that, operator, please open the line for questions.

[Operator Instructions] Your first question comes from Michael Rae with Melius Research.

It's Mike Rehard. And congrats on the quarter. First, I'd love it if you could kind of walk through kind of a regional review, how the markets are doing, anything standing out more positively or negatively, obviously, the the macro is changing and you talked about that in your remarks. But just I'd love to understand how things are going and how they progress throughout the quarter.

Yes. Sure. I got that one. Mike, thanks for the question. let me try to keep this as succinct as possible, but we'll take you a little bit of a tour, start with the macro and then go into some of the regions. Look, I think the first thing that we mentioned on the call several times and what's important is we're outgrowing the market. Even though the backdrop is weaker than when we guided in May. We think in third-party sources confirm, we think R&R has softened a bit further, approaching mid-single-digit decline versus low single digit in May that we talked about. And new construction has really gone down from mid-single digits to what we think is high single digits. New construction is soft, as I mentioned. And we're particularly seeing that in areas like Texas and the West. R&R in total is holding up better. than new construction, but still down. And higher-end work is the strongest, particularly in areas like the Midwest and Northeast, which really plays right along with our strategic priorities here. The other piece I'll mention when we think about the segments is multifamily. The market is choppy, but with affordability keeping buyers out of single-family homes, we're seeing good growth for us in that segment. Let me just hit on a couple of the regions here. I mentioned South Central in Texas. And that remains even though we're positive there. that is our weakest performing region, and that is because of some of the challenges we're seeing in new construction. If I look at the Southeast, the Carolinas remained a structural bright spot. That's driven really by the end migration. And we believe we're growing above the market and really taking share with our Trim-over product. and we continue to see good progress there. If I look at the West, the West is probably the weakest region. If you look at completions and new home sales are both down double digits, builder confidence remains low, affordability remains a key concern. Even with that said, our West volume still grew significantly, and we think we're taking share out there in the West. And then I mentioned before the Midwest. Repair and remodel is doing well in the Midwest, which is a bright spot for us, certainly in decking. And we'll also continue to make significant progress when we think about our ColorPlus and Trimover product. If we look, and I know we quoted this before, if we look at some of our Fiber Cement volumes, we're growing low double digits and with ColorPlus we're up close to 20% on conversion from vinyl. So if you remember, that is the pilot region. We really started with the Trimover. So a good proof point there. And let me just sum it up here. the Northeast is really the weakest region for new home starts, but really strong from a remodeling standpoint. And we're certainly seeing that in the favorability with our Deck, Rail & Accessories business, but also our ColorPlus volumes, our revenue in the Northeast were up 35%. So as you look at the macro, you look at some of the regional, I think the big takeaway is we are outgrowing the market. even with the softness. And if you think about our strategy, we're really executing well.

It's a great review. Second question, maybe kind of a slight 2 parter. And one, just to clarify, you talked about growing in excess of your 4% to 7% above market target. Just wanted to get a finer detail on what you estimated that was for the quarter? And secondly, on the margin or EBITDA profit dollar reiteration. Just wanted to get a sense -- I mean, it's slightly lower and Siding & Trim slightly higher on Decking Rail. What's allowing you to offset the higher cost inflation coming in at the higher end?

Yes, Mike, I'll take the first, and then I'll hand the margin question over to Ryan. We're really confident when we think about an Investor Day, we said, "Hey, our target is 4% to 7% above the market." If we gauge the market being down, call it, and certainly a full year has to play out, but we think mid-single digits. If you look at Fiber Cement, we're up about 15%. Half of that is from price and mix, the other from volume. So we're certainly outpacing the market almost from a double-digit standpoint. And we would say really the same thing as we look at DR&A. Ryan, do you want to take the margin question?

Yes. And as you think about the $80 million to $100 million cost pressure, when we guided the year, we've held that consistent throughout the year. So we weren't really ever planning for a relief, and I think it was prudent that we did. So when you think about kind of how we offset it, right, we continue to focus on cost savings and other network optimization, deploying costs across AZEK help offset that. We're applying cost SG&A as well. And then we did do a modest midyear price increase that was pretty selective across certain products and that helped absorb some of the pain as well. So from a whole year perspective, we've been maintaining that range and nothing's really changed. We still expect the cost exposure to be roughly in that $100 million range. The buckets have just shifted a little bit.

Your next question comes from Lee Power with JPMorgan.

Aaron, maybe just on the Boise rollout. I think you said a few times around healthy inventory in the market. It would be interesting to see how your approach to that change through the period, if at all? Because you obviously wanted to succeed, but it's a kind of a tough environment to do it where you've got, as you said, an end market that's kind of deteriorating at the same time.

Yes. Lee, look, I don't think anything has changed for us. I think what we're being very cognizant of in Johnson here and the team and they're continually looking at is we want to make sure we're getting our 2-step partners like Boise stocked up. But also, with that said, being cognizant of making sure we're not overstocking with inventory. So as we look and Ryan talked about some of the numbers, if you look in the back half of the year, we are focused more on sell-through, right, which is going to be better than what we think is sell-in. So we are on track with Boise and all of our regional distributors as far as getting them stocked up. Certainly, Boise, the largest one when we think from a Deck, Rail & Accessories standpoint. So I think for where we're at in the season and what we're preparing to do, we would reiterate that inventories are at expected levels for us.

Okay. If you can then just a follow-up as a bit of a broader question. Is there a scenario where you think R&R can be up and your construction down in the kind of the current backdrop? Like clearly, both of you said it's deteriorated. I'm just trying to think, as we go forward, is there a scenario, a lot of your peers obviously charted to deconstruction being down by in calendar year '27. Does that -- do they have to move in lockstep? Do you think the market is in the current backdrop? Or is there a scenario where one can be positive in one can be...

Yes. Look, I think what we would say, Lee, and this is from talking to a lot of our customers. And certainly, things can change as we don't see much of an improvement or any help from a market standpoint. What we can focus on is how we perform in those markets. And certainly, our focus is outperforming the markets 4% to 7%. And like we put out there from a growth algorithm standpoint. Certainly, repair and remodel, we're not seeing as impacted like new construction. If you think about our mix now as a new company, we're 60% repair and remodel and 40% new construction. But certainly, that decline in new construction, we think is real and continues to grow, and we see an impact of that.

Your next question comes from Phil Ng with Jefferies.

Congrats decking, right? Decking tends to be more resilient in general?

Phil, we're losing you. You keep going in and out.

Can you hear me better now?

We got you now. Yes.

Okay. On the decking side of things, it tends to be more resilient. I'm curious what your contractor survey work, web traffic is telling you. Also, from an inventory standpoint, I think you said you guys were fine, but I think Boise actually came out and said perhaps inventory in the channel is a little more heavy. Is that a consideration in terms of your outlook for the back half for a Decking? It feels a little more muted versus perhaps your biggest competitor who's talking about an acceleration in terms of sell-out trends.

Yes. Look, I'll start out with your first question when you think about decking being more resilient. Certainly, as you look across the platform here of some of our competitors here, you've seen pretty good results from a decking standpoint. And that would say that decking is bucking the trend. We think decking is positive. But with that said, we continue to outpace the market. If you look at our DR&A business, we're up, call it, 14%, 15% for the quarter. I think the other thing it's important to note and you do see some of our competitors talking about we think it's good that the trend is up. But if you look at the legacy Timber Tech business, and I look at this really on a 2-year growth stack, we're up about 21%. So if you look at that versus anyone else, we continue to outgrow the market, and we expect to continue to do that even with the market being positive in decking. And what was -- Phil, what was your last question? Was it about Boise?

Yes, inventory levels in the channel.

Yes. So Jon, do you want to hit on inventory levels here?

Yes. Yes. So Phil, the way this works is you immediately want to get Boise in business, right? And so what you want to do is you want to accelerate the load-in of the inventory because once you make the announcement, you want to put them in a position where they can needle start to build customer relationships and tend to take orders. So you inject a high amount of inventory, and we gave you all the figures in terms of the amount of growth this quarter that came from that load-in. You're doing that at the same time where the distribution partner he exited are burning down the inventory, right? And so our expectation is that all of our go-forward distribution partners are aligned with us during this early by period where we're out meeting with customers and getting ourselves positioned for next year. And so then what you'll see as we flip into the next calendar year, Boise will start to sell through all that inventory that we've placed with them and we will have exited our former distribution partners at that same time.

Okay. So it sounds like the inventory is creating. So the load in and draw downs creating some noise in your guide for the back half. Okay. Helpful. Perhaps a question for Ryan. Certainly, a lot of inflation right now. Can you give us some perspective in terms of what pricing actions you have out there? I think Siding, you guys announced increases for January, but any color in terms of net realization? And have you guys announced anything on decking and railing as well?

Yes. So I mean, to give you context on the quarter, right? I don't think we quoted what the DR&A realization was. But on fiber cement, when we had about 15% growth, we said half was volume, half was price and mix and you think about probably 30%, 35% of that was mix. We continue to see solid traction on ColorPlus sales. Those were up 22% in the quarter year-over-year and are now 25% of our Fiber Cement portfolio. So we are seeing a nice contribution from the mix piece. So in the financial year, right, we did our normal 1:1 increase, and we had a modest selective product increase at the end of April that went into effect [indiscernible]. We did announce a new increase, which is our traditional annual increase for 1:1 on both sides of the business. So we would expect to see roughly 3% or so consistent with our framework on Fiber Cement and then DR&A in that kind of 2 to 3 range like we've got before. So those are our typical annual increases. We stay consistent with those. So that's kind of where we're at. Any other question on that or...

Yes. Is that enough to offset inflation as we kind of head out to next calendar year?

Yes. From what we're seeing right now, yes. And as we've quoted earlier, right, I mean, we have the freight contracts coming up for renew. So this year, we're trying to expand what we have under contract versus spot. And then next year, as we negotiate those contracts here for the beginning of the calendar year, we will have more under spot, which will reduce some of that exposure from freight rate.

Yes. Phil, just to add on to that. Look, the other thing that we're benefiting from and we continually talk about is our cost savings. So the Hardie operating system, that's the efficiency in which our plants run. That's formula optimization. So we've been doing that for years with James Hardie, and we wheeled it out to our deco and accessory plants as well. So obviously, from a pricing standpoint, we'll take price if we need to. But we also rely on that as well.

Your next question comes from Nathan Reilly with UBS.

I was just looking for a little bit of help. Can you just help me sort of understand the lower the declining revenue implied guidance for Decking & Rail in the third quarter. Just trying to pick together, obviously, your comments around the market, your price assumptions, but also just the impact of channel loading. I just wanted to get a bit of an understanding in terms of what's driving that lower revenue growth for this year, please?

Do you want to take that, Ryan?

Yes, I can start out. Yes. So historically, Q3 calendar Q4 is Deck, Rail & Accessories lowest seasonal -- we have a lot of seasonality there. So that's a seasonal low for us from a quarter perspective. So you do see that decline naturally going into the back half. And that's really driven by a lot of our channel partners try to reduce their inventory position by calendar year-end to prepare for early buy and restocking in the spring. So that's one of the major drivers of the drop. And then as we hit on a little bit earlier, right, any time you have a load in, the goal is to ensure our end customer demand from a contract and dealer perspective isn't affected and that we're monitoring sell-through. We do believe we will work through kind of that additional load in that we had with Boise through the back half of the year and that normalizes. But those are really the 2 major reasons that there is a decline from the first half to the second half. I don't know, Jon, if there's anything you'd add to that.

And just what I'd add, again, I think the most important equalizer of the load-in trends and sell-through, right? So we had really strong sell-through in the quarter. We've had really strong sell-through full year. The most recent quarter was double digit as we start to unpack this current quarter. We continue to see sell-through above our initial guidance for the year, which was mid-single digits. So we're continuing to drive strong demand and strong sell-through in the market. We're just in this one period of low seasonal demand from distribution, coupled with the load-in once we work through that at the end of the year and then you get into the next calendar year, we start to see sell-through and sell to equal each other, and we continue to drive really strong demand there.

Yes. Nathan, I think it's important, and Jon mentioned it and those who haven't covered DR&A before is Q3 is generally the slowest time. So to Jon's point, I mean what we go through right now is early by and we're trying to make sure that we're keeping the inventory clean and we're loading up distributor partners. And then as you get into Q4, you start to see some of that sell through -- our sell-in and sell-through pick up. Okay.

And I was just going to ask just in relation to the PCP. So the third quarter guide is obviously quite low relative to the third quarter of '16. So it does sound like that distribution realignment is the key swing factor there in terms of what's driving that lower overall revenue guide?